Vietnam powers up through FDI and IPOs

Foreign investment pours into the power sector as the country seeks to resolve electricity shortages.

The power sector will become an increasing investor focus over the coming decade as the Vietnamese government seeks to bridge power shortages through foreign direct investment (FDI) and the public equity markets, analysts and investment bankers say.

The government is having to play catch up because installed capacity growth has been running far short of demand, which has surged to low double digit levels thanks to the country’s booming manufacturing sector.

But analysts say Vietnam is now getting its act together and is planning to triple capacity by 2030 when the government forecasts consumption will reach 550 billion kWh compared to 84.1 billion in the first half of 2017.

Barry Weisblatt, head of research at Viet Capital Securities says liberalisation is forging ahead on a number of fronts leading to a spike in power sector FDI. There was, for example, more investment during the first half of the year ($5.24 billion) than the past five years combined. 

A quartet of state-owned entities are also being lined up for divestment via initial public offerings.

PV Power

First off the block will be PetroVietnam subsidiary, PV Power, which ranks as the country’s second largest electricity producer after Electricity of Vietnam (EVN).

The deal structure has been revised a number of times, but the government has finally decided it will retain a 51% stake and sell 28.9% to strategic investors and 20% through the public equity markets.

The IPO will also now come first and is scheduled for December using the government’s favoured Dutch auction process and a group of agent securities companies to take orders.

Local bankers said the IPO is likely to be well received. 

"PV Power has an easily understandable business in a favoured sector with good assets particularly on the gas powered side," said one. "It should be very straightforward and the stock will also be very liquid as the government is selling off a sizeable chunk."

The company accounts for just over 10% of national capacity and currently has installed capacity of 4,208MW comprising four gas-fired plants, three hydro plants and one coal plant.

During the first half, it reported revenues of VN15.5 trillion ($682 million) and net profits of VN1 trillion. 

Existing comparables include REE and PetroVietnam’s Nhon Trach Power 2 (NT2), although bankers say REE is less of a benchmark since it derives a big chunk of its profits from property.

NT2 runs the country’s largest listed gas fired plant and reported revenues of VN3.5 trillion for the first half of 2017 and net income of VN456 billion. It is currently trading around 7.57 times forward earnings.

Genco 3

Second in line for divestment is EVN Generation Corp 3 (Genco 3), which is at the final stages of getting approval for its equitization plan (Vietnam’s word for privatisation). It had total assets of $4 billion as of January 2015 and installed capacity of 6.4GW, accounting for 15.4% of national output at the end of 2016.

Again the government plans to hold 51% and sell the remainder to a combination of strategic and retail investors.

The PetroVietnam subsidiary reported revenues of VN35.9 trillion ($1.6 billion) in 2016 and net profit amounting to VN265 billion ($11.7 million).

As part of the government 2030 plan, Genco 3 is planning to build a gas thermal complex called Long Son with 1,800MW of capacity by 2025.

PV Oil

The third of the quartet is the country’s second largest retailer behind Vietnam Petroleum Corp (Petrolimex). It had an enterprise value of $456 million in 2015 and the government has said it wants to sell a 29% strategic stake and 20% through an IPO.

Bankers believe that even though it has a much lower 22% market share compared to Petrolimex, it will be well received because its state-owned rival is capped at 51%.

“It was only set up 10 years ago and has maintained a strong growth profile,” said one investment banker.

Binh Son Refining

The operator of Dung Quat Refinery was supposed to launch its IPO on November 7, but has pushed it back until early next year so the government can sell a larger stake according to local bankers.

In the summer, it had said it planned to offload just 5% raising around VN1.9 trillion ($84.78 million) on a reference price of VN14,600.

The company represents the country’s first oil refinery and is a subsidiary of Vietnam National Oil and Gas Group.

Market liberalisation

Viet Capital’s Weisblatt says the government has done a good job liberalizing the sector so far.

“Inflation has been low, putting the government in a better position to phase out some retail subsidies,” he commented. “Currently, retail electricity prices are 50% lower than the Asia Pacific average.”

On the production side, the government has taken two major steps.

In 2012, it established a competitive generation market (CGM) and Weisblatt estimates that about half the country’s daily production capacity passes through it. Each participant specifies the amount they are willing to sell for the following day.

In 2019, it will also launch a wholesale competitive market (WCM), whereby certain wholesale buyers will be able to make cash payments direct to power producers.

From coal to renewables

Much of the government’s power push involves coal-fired plants, a prospect that will dismay many investors and not help Vietnam to meet its Paris environmental commitments.

Thanks to heavy Russian investment, Vietnam has a plethora of hydropower stations accounting for about 45% of national output. But all the good locations have now been taken and hydro’s share of the overall market is expected to decline to one fifth by 2030

Recent investment into coal will increase its market share from about 38% to 51% by 2025. Recent deals include the $2.8 billion Build Operate Transfer (BOT) Nghi Son 2 project creating 1,200 MW (Kepco and Marubeni) and $2 billion Nam Dinh 1 project, which will add another 1,110 MW (Taekwang Power and Saudi Arabia’s ACWA Power).

However, bankers noted that private equity money is starting to flow into the renewables sector.

Up-and-coming projects include an 800MW wind power plant, which General Electric has invested in. VietCapital estimates that domestic groups including Bamboo Capital and Thanh Thanh Cong Group have invested $2.5 billion to bring 1,890 MW online.  

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